Future-proofing your wealth

Here are some of the wrappers and allowances that can help reduce the various taxes you, and possibly your parents and children, will pay now and in the future.

There are numerous ways of legitimately reducing the amount of tax you pay now, and in the years ahead, including the amount of inheritance tax likely to be due when you die. Most involve putting money in a tax-efficient “wrapper”, such as a pension or investment bond. Here we look at a few that are commonly used in sensible financial planning.

ISAs: no income or capital gains tax to pay

If you have savings or investments you should probably be holding them within one or more ISAs, making use of your personal allowance each year if possible. If they can, your partner should also make use of their allowance. A huge range of investment funds are available and it is important to choose ones that meet your circumstances and objectives.

Investment bonds: withdraw up to 5% a year

Investment bonds are provided by life assurance companies. A lump sum is paid in to the policy and can then be invested in a wide choice of investment funds. You can withdraw up to 5% of the amount you invested each year with no tax to pay until later. You can carry any unused allowances over to future years if you so wish. The idea is that the investments should grow each year by at least the amount you are withdrawing. However, you need to make sure that they are suitably invested. There should be no tax to pay when you cash in the bond unless you are a higher or additional rate taxpayer at that time.

Investment bonds can be a useful way of investing money if you expect to be a lower rate taxpayer later in life, for instance when you retire. Another advantage is that it is usually possible to give some or all of the bond away, for instance to people who pay little or no tax, such as your grandchildren.

Using inheritance tax exemptions

Each year you can give away up to £3,000 exempt of inheritance tax. Any part of the exemption not used can be carried forward to the following tax year. You can give away as much as you want to whoever you want and, so long as you live for at least a further seven years, the gift doesn’t count towards inheritance tax.

In addition, the government now allows money in pensions funds to be passed on free of inheritance tax. You can pass it on to whoever you wish by completing an “expression of wishes” form with your pension provider. Depending on how old you are when you die, your beneficiaries may have income tax to pay on money they withdraw from your pension. This means that for some people it can be preferable to take retirement income from other sources before taking it from their pension fund.

We can help

Part of our role as professional financial advisers is to make sure that your investments are as tax-efficient as possible. To book a no obligation initial consultation call 08000 85 85 90 or email appointments@lighthousefa.co.uk or contact your usual Lighthouse Financial Adviser.

The initial consultation is designed to discover whether or not you would benefit from financial advice and there is no obligation on either side to proceed further. Any advice related fees will be clarified with you before any commitment to proceed.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice with no investment element is not regulated by the Financial Conduct Authority.